About RBC > Media Newsroom > News Releases > Anxious about government debt, more of worlds top business leaders expect governments to cut spending than to increase taxes, according to semi-annual RBC Capital Markets Global Survey

Anxious about government debt, more of worlds top business leaders expect governments to cut spending than to increase taxes, according to semi-annual RBC Capital Markets Global Survey

NEW YORK, LONDON, TORONTO, January 31, 2011 —
More than four-in-ten executives (46 percent) from around
the world said their own country's external debt was growing
at an unsustainable level, according to a survey of 461 finance
and global business leaders. Over 60 percent of U.S. and UK
respondents believe that to be true about their government's
debt. In Europe, respondents from the UK and the periphery
of the eurozone, such as Portugal, Ireland, Italy, Greece
and Spain, are among the most pessimistic about their nation's
external debt. Conversely, Canadian respondents were among
the most optimistic.

The third semi-annual RBC Capital Markets Global Survey was
commissioned by RBC Capital Markets, the corporate and investment
banking arm of the Royal Bank of Canada, and conducted by
the Economist Intelligence Unit. The survey measures the sentiment
of global executives at a crucial time when global imbalances
between the developed and developing world are producing diverging
outcomes in economic prospects and fiscal and monetary policies.

Against this backdrop, nearly half of executives polled (49
percent) said that their government would reduce its debt
level mainly through spending cuts, while three-in-ten executives
(30 percent) believed that their government would rely primarily
on tax increases. An additional 13 percent of respondents
thought inflationary policies are the primary way their government
will reduce debt.

"The debt that hangs over individual countries is casting
a long shadow in the minds of corporate executives and investors,"
said Marc Harris, co-head, Global Research, RBC Capital Markets.
"The results of the RBC study are a clear call to action
by the world's business leaders."

The survey included findings on:

Government debt

Inflation risk

Trade policies

Interest rates

Taxes

Other government action

Government Debt: With large amounts of debt
needing to be refinanced in the next 12 months, 12 percent
of executives polled predicted their government will experience
a funding shortfall over the next one to three budget cycles
and will not be able to fund that shortfall. More than one-third
(36 percent) said their government will be able to fund the
shortfall, but it will be difficult, and a similar number
(34 percent) expected their government will easily be able
to fund the shortfall.

An overwhelming majority of the executives surveyed (85 percent)
said there was a chance that one or more eurozone countries
would leave the monetary union over the next three years.
Just 15 percent said there was zero chance of that happening.
Though the majority of those polled (60 percent) said there
is a chance that the eurozone would break-up over the next
three years, 40 percent believed there is a zero chance of
this happening.

"Fiscal austerity measures are a concern for global
executives anxious that a persistent downward spiral of higher
levels of debt will lead to slower growth, a further withdrawal
of assets and more losses on bank balance sheets, said Richard
E. Talbot, co-head, Global Research, RBC Capital Markets.
"Even in countries that are less severely affected by
sovereign debt problems, almost all respondents believe that
governments will have some problems financing themselves,
particularly when the scale of debt that is maturing over
the next year is taken into account."

Inflation Risk: Asked about the most likely
scenario in their domestic market over the next three years,
84 percent of respondents expected inflation to increase in
their country, compared with 58 percent in the RBC Capital
Markets Global Survey completed in May 2010; only 14 percent
of respondents expected a trend towards either stable prices
(no inflation) or deflation. While respondents agree on the
increased risk posed by inflation, respondents were split
on the causes of inflation, with 39 percent attributing it
to excessive monetary stimulus, 34 percent to higher import
prices (including commodities) and 20 percent to excessive
fiscal stimulus.

Trade Policies: Three-in-ten of the financial
executives polled (30 percent) said the main constraint on
exports from their country was lack of external demand. An
additional 20 percent cited overvaluation of domestic currencies
while 11 percent pointed to trade barriers, including tariffs
and regulations. Other responses included: undervaluation
of foreign currency (10 percent); currency volatility (eight
percent); and lack of external financing (five percent).

In terms of the main constraint on their company's exports,
one-in-five corporate respondents (21 percent) cited the lack
of external demand, while 14 percent pointed to trade barriers
and an equal number cited overvaluation of the domestic currency.
Ten percent of corporate executive polled indicated that currency
volatility is the main constraint on their company's exports.

Interest Rates: Asked how corporate borrowing
costs would be affected in countries that become more fiscally
challenged, 35 percent of respondents said there will be wider
spreads compared to sovereigns, but a similar number (32 percent)
expected the opposite, saying there will be tighter spreads.

Taxes: Half of all survey respondents (49 percent)
believed that the banking industry is most likely to see higher
taxes as governments try to rein in deficits. An additional
third (32 percent) believe that energy companies will see
increased taxes, and a similar number (27 percent) predicted
an increase in taxes on natural resources. One-in-five global
executives (19 percent) expected that the telecommunications
industry will see an increase in taxes.

Other Government Action: In terms of actions
that governments could potentially take in the next 12 months,
nine-in-ten executives (90 percent) believed that there is
some chance their government will impose significantly higher
reserve requirements for banks, with government debt counting
as reserves. An equal number (90 percent) said their government
may tax individuals at higher rates over the next year. A
similar share believed their government could impose liquidity
ratios (88 percent), implement quantitative easing (88 percent),
or impose higher taxes on corporations (85 percent) in the
same time frame. Other responses included:

Regulatory mandates on credit allocation

81 percent

Requirements for below-market financing to the government

75 percent

Exchange controls on capital outflow

63 percent

Caps on interest rates that banks can pay on deposits

58 percent

Said Marc Harris: "Investors are still processing the
portfolio implications of diverging fiscal and economic policies
in the U.S., Europe and emerging markets. The U.S. has so
far been reticent in embracing fiscal consolidation and the
potential long-term implications of their government deficits,
while Europe has already begun implementation of austerity
measures to deal with the peripheral effects of the sovereign
debt crisis and the potential of future debt challenges. The
opposing trajectories undertaken in the U.S. and Europe are
producing a sharp outflow of capital to emerging markets,
and a heightened potential for market volatility in the coming
year."

About the survey
RBC Capital Markets commissioned the Economist Intelligence
Unit to survey 461 senior executives from around the globe
(North America [38 percent], Western Europe [38 percent],
Asia Pacific [14 percent] and Rest of the World [nine percent],
including both clients and non-clients of the firm, on their
outlook for the future of capital markets. The survey was
completed in January 2011. The respondents included 211 senior
executives from commercial and investment banks, hedge funds,
asset managers, pension funds, sovereign wealth funds, institutional
investors and private equity firms and 250 executives from
non-financial companies active in the global capital markets.

About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking
arm of RBC and is consistently ranked among the top 12 investment
banks globally. With over 6,000 employees, RBC Capital Markets
is active globally in fixed income, foreign exchange, infrastructure
finance, ECM, metals, mining and energy. Working with clients
through operations in Asia and Australasia, the UK and Europe
and in every major North American city, RBC Capital Markets
provides products and services from 75 offices in 15 countries.
For more information, please visit www.rbccm.com.